Vacation Rentals are NOT Passive Investments

Log Cabin Vacation Rental

Short-term rentals are NOT the least bit passive.

From the moment my Dad lent me his copy of Rich Dad, Poor Dad, I always dreamed about investing in real estate. Not just investing in my primary residence, but utilizing real estate investing to generate passive income that moves you from the left to the right side of Rich Dad’s CASHFLOW quadrant.

But as I focused on my career and my startups, it was something I put on the backburner.

Finally becoming Accidentally Retired allowed me to take the time to educate myself, diversify our investments, and shift cash we were holding on the sidelines into something that could generate passive income stream.

There are so many reasons why investing in real estate makes sense:

  1. Diversify our investments (currently predominantly stocks/bonds/alternatives)
  2. Generate passive income with buy and hold investment strategy that yields positive cash flow
  3. Grow our skills as investors and learn something new
  4. Passion for real estate investments

So after some discussion and reviewing potential financials for everything from commercial properties, to single family homes, multi-family homes, etc. we settled on a vacation rental.

We felt that a vacation rental would allow us to enjoy the property as a second home, give us a new challenge, and if we ran it as a business v. a hobby, we could achieve high occupancy and higher cash on cash return than other real estate investments, making it worth the additional time and hassle.

Owning a vacation home was also on my bucket list, so this all felt really natural.

So I connected with a realtor in the area we were looking at who also ran her own vacation rentals. I also connected with another real estate investor I know, who has a lot of experience buying foreclosure properties.

We were able to get a lot of good information, and I built a pretty kick ass real estate investment calculator to analyze our prospective properties with.

The hunt was on.

But then after weeks investing in my real estate education, I realized the gross error of the vacation rental business…

#1 Investing in a vacation rental is NOT passive

Just a few short weeks into my journey towards finding a property, this was already taking up a significant amount of time. I was working 3-4 hours a day between educating myself, looking at properties, and thinking through property management.

This is before owning the property in which we would need to renovate, furnish, find cleaning services for, etc. etc. The list just goes on for days.

#2 The returns WILL NOT outperform the total stock market

There is just no way around it. If you pay a property manager to run the property, it will cut into your profits significantly. And while, you may be able to find a good property manager with a lot of work, it is likely to cost you 2-3% per year in returns.

Now, we had plans to manage the property ourselves remotely, but at least in the area we were looking at, the returns simply did not outpace any other asset class.

This is why most of the real estate investment experts emphasize that you make money when you buy any property. The front-end deal is the most important. But even a great deal with forced appreciation may only yield between 10-12% yearly returns.

Meanwhile Vanguard Total Stock Market Index (VTSAX), has yielded an average of return of 11.30% in the last 15 years. And it costs us only 0.04% in fees to invest our money into VTSAX for a lot less hassle, headaches and risk.

#3 We are in a sellers market

At least at the current moment, we are in a sellers market. There is not enough inventory and the prices have been driven up due to increased demand in our market plus continued low interest rates.

#4 Short-term rentals are oversaturated

Short-term rentals in our area are oversaturated. I contacted a few owners and the one thing I hear is that they have to continue to lower nightly rates to retain occupancy levels they are looking for.

This trend will only continue as more people move to our state and as AirBnB and VRBO become more of a popular choice.

Conclusion

Right now, I am glad that we made the decision to pause our hunt of a vacation rental. Even though it has always been a goal of ours, it feels good to already have more time and less stress.

Our goal is to generate passive income, so that is going to require actual investments that are passive. Right now, VTSAX is looking like the perfect passive investment, and offers plenty of diversification.

I will be looking at Real Estate Syndication (Crowdfunding) and even at single family residences (more passive, but not completely passive), but for the moment, I will sleep better at night having not entered into the chaos of vacation rental ownership.

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